Approximate and Almost-Exact Aggregation in Dynamic Stochastic Heterogeneous-Agent Models

Michael Reiter

No 258, Economics Series from Institute for Advanced Studies

Abstract: The paper presents a new method to solve DSGE models with a great number of heterogeneous agents. Using tools from systems and control theory, it is shown how to reduce the dimension of the state and the policy vector so that the reduced model approximates the original model with high precision. The method is illustrated with a stochastic growth model with incomplete markets similar to Krusell and Smith (1998), and with a model of heterogeneous firms with state-dependent pricing. For versions of those models that are nonlinear in individual variables, but linearized in aggregate variables, approximations with 50 to 200 state variables deliver solutions that are precise up to machine precision. The paper also shows how to reduce the state vector even further, with a very small reduction in precision.

Keywords: Heterogeneous agents; aggregation; model reduction (search for similar items in EconPapers)
JEL-codes: C63 C68 E21 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2010-10
New Economics Papers: this item is included in nep-cba, nep-dge and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

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https://irihs.ihs.ac.at/id/eprint/2021 First version, 2010 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:ihs:ihsesp:258

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